Why You Should Raise Money to Buy Apartment Buildings

People tell me they’ll start their investing career when they have money.

But who knows when that will happen?

And so they wait. Or they’ll say they can’t see themselves putting a building under contract if they don’t already have the funds in the bank – who will take them seriously? Or how can they raise all of the money in time to close? And how can they get money from investors when they don’t have a building under contract? It’s a catch 22, and so they’re stuck.

I’d like to take these objections entirely off the table right now.

Raising Money From Private Individuals

The truth is, you don’t need tons of your own money or good credit to get started with apartment building investing. The secret to getting started now is to raise money from private individuals. Here’s why.

You don’t need your own money. I hate stating the obvious, but since the lack of money is the biggest objection to getting started with apartment investing, it deserves to be stated plainly. Just to re-emphasize this point, if you raise money from investors you don’t need to use or have any of your own.

You can get more deals done. Even if you have your own money to invest, there is only so many deals you can get done. On the other hand, if you are able to raise money from others, the sky is the limit. Your ability to accumulate property is then only limited by your ability to find good deals. The ability to raise money is an incredibly valuable skill to have.

You can do bigger deals. With the backing of investors, you can go after bigger (and more lucrative) deals than just using your own funds.

You have more eyes on the deal. Richard Feynman, the famous physicist, once said that “the first principle is that you must not fool yourself and you are the easiest person to fool.” When you’re using your own money, no one else is looking over your shoulder, and you’re more likely to make mistakes. If you can convince others to invest in your deal, chances are, you actually have a good deal.

Disadvantages to having Investors

However, there are some disadvantages to having investors:

You now need to report to your “bosses”. Chances are you’ll have to report to your investors in one form or another. You may have to give updates and financial reports to your investors to keep them posted. This certainly is more work than if it were just you in the deal. On the other hand, analyzing the Profit & Loss (P&L) statements and sending out reports make you pay more attention to the deal. You should do the same if there are no investors, but few of us have this kind of discipline, and as a result we don’t pay as much attention to the investment like we should.

You may lose some control. You may not be able to make all of the decisions without a vote from your investors. As I’ll discuss in later posts, there are ways to mitigate this risk with how you structure the deal.

You won’t get 100% of the profits. That’s true, but as the saying goes, 100% of nothing is still nothing. If you can own 100% of the building by using your own money, great! But if not, use investor money and get in the game!

All in all, though, the advantages of using other people’s money far outweigh the disadvantages. This doesn’t mean you shouldn’t use as much creative financing as you can (especially seller financing). Bottom-line, if you get skilled at raising money from others (like Donald Trump!), you can get started with real estate investing TODAY.

Thanks for reading, and let me know what you think!

Michael

P.S. You’re probably thinking, “OK, Michael, I can see your point, but how do I raise money from others?” Because this is such an important topic but not frequently talked about, over the next few weeks, I’d like to share with you some of my experiences with raising money and syndicating deals, and hopefully you’ll find that useful. Stay tuned!Photo Credit: ZachAncell

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About Author

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

“analyzing the Profit & Loss (P&L) statements and sending out reports make you pay more attention to the deal”

I recently went to get some additional investments. The investors ran some numbers and questioned mew on a few things. This forced me to dig into the number more than I normally would and I noticed a few things that were not correct, or a few things that we were paying for that we no longer needed. Sometimes that outside push is just what we all need.

Great article. No matter how many times it is said, it never gets old.

Hi Michael, great article! My name is Pei Pei, I’m from Malaysia (a country in South East Asia). I told my friends that i invest in US, and many of them want to give me the money to invest for them. How should i work on this? How should i charge the investors or how to split profit? Thanks in advance for your reply.

Great post and great topic. Maybe this is forthcoming in your next post, but I would love to hear you elaborate on specific ways the pie might get divided in a typical private money deal. Who get’s what in the end? When do they get it, and for how long? How is it spelled out? etc

Great article, short and to the point. What about for those of us just starting out, with no money and no experience? I’m hesitant to pursue a deal and ask others for their money without any credibility (yet).

Hi Marcus … Over the next weeks I will continue to write about raising money. You can also download my free ebook “The Secret to Raising Money to Buy Your First Apartment Building” which might give you some additional insight. Hope that helps, and thanks for reading!

Or how can they raise all of the money in time to close?
And how can they get money from investors when they don’t have a building under contract?

— Great this is where I am at. I can get the money dependent on the deal and I’ve lost a couple deals because I can’t get enough information from the seller because I couldn’t cut a 30k emd check. And I know I can stage the contract and DD period with the seller and my investors to raise the money but how do you bankroll the initial EMD? It’s what’s kept me from jumping up. So I’m liquidating assets so that I can have that cash.

However, your article promised to remove these objections from the table, but didn’t.

Ah, one should never make a promise, there’s always the risk one can’t live up to it -;) There are many challenges with raising money, and I hope to write more about it in future posts (there are additional tips in my ebook). So I ask for your patience. WRT your specific question about how to finance the due diligence phase. This is a real challenge. If you need, to, beg and borrow, use credit cards, liquidate stuff like you’re doing. If you’re raising money, you can also get one of your investors to bankroll you in return for a small % of ownership in the building for the favor. You will get all of this money back at closing. The risk is if you don’t close. Therefore, be systematic and thorough with your due diligence, and delay spending money as long as possible. That way, your chances of closing (and getting your due diligence money back) are very good.

Hi Pete … hey, don’t knock 2-4 multi-units, those are apartment buildings too -;) In general, I recommend buying the largest building you can or you’re comfortable with, and then expanding your comfort zone over time. There are several reasons for this:

1. You achieve economies of scale with a large building. This means less expenses as a percentage of income, which means more income!
2. You have less maintenance: do you want to maintain 4 different roofs or just one?
3. There is less risk: if you have 1 vacancy in a duplex, half the building is empty. Vs. One in a 20 unit … you get the idea.
4. The closing costs are about the same for a smaller building and a larger building. For example, the appraisal costs $2500 for a 12 unit but might cost $3200 for a 50 unit. The attorney fees and the bank doc prep fees are all fixed costs.

Michael, where are you finding financing for these deals? Are firm offers long term financing on apartment buildings. We are competitive with Fannie Mae, but I think FHA is really cheap. Do you think FHA offers any value outside of rate. The 10 year us treasury has gone up 1.5 points over the last year and a half. Where do you see rates going?

I don’t have any direct experience with FHA loans, but I checked with my preferred lender, and here’s what I found out.

FHA will do construction, renovation and purchase/refinance. Loan proceeds are also typically higher because they will lend as much as 83-85% LTV. FHA will also do as high as 35 year fixed rates so you have the potential for more proceeds due to longer amortization’s impact on the Debt Service Coverage Ratio (DSCR). The DSCR requirements are also lower (1.18 vs 1.25 in FNMA).

But FHA can take an extremely long time to close (as long as 6-12 months). Some lenders will provide a bridge loan, however it is typically on stabilized buildings.

As far as rates…our opinion is that they are going up. There may be some retracement before continuing the ascension, but ultimately going up.